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Wage growth has slowed across major economies over the past six months, in a further sign that central banks are under increased pressure to begin cutting interest rates in the first half of the year.
Year-on-year growth in advertised wages and salaries stood at 3.8 per cent in the US in December following a steady two-year decline from a peak of 9.5 per cent in late 2021, according to a cross-country wage tracker published by the job search website Indeed.
Annual wage growth also stood at 3.8 per cent in the eurozone, down from a 2022 peak of 5.2 per cent, according to Indeed. Even in the UK — where wage growth has been stronger and more persistent — the median rate of pay cited in job ads was 6.6 per cent higher than a year earlier, down from a peak of 7.4 per cent in June.
The figures will reassure monetary policymakers who worry that it will be harder to bring down inflation sustainably to target if wages continue rising rapidly and companies pass on the costs to consumers.
The overall picture offered “good news for workers and job seekers”, according to Indeed, as the slower rate of wage growth was still outpacing the rise in consumer prices, aiding a recovery in living standards.
Inflation has fallen sharply in all major economies over the past year, with the latest data showing it at 3.4 per cent in the US, 2.9 per cent in the eurozone and 3.9 per cent in the UK. But price pressures are still bubbling, with inflation in the labour-intensive service sector still too high for rate-setters’ comfort.
Investors are betting that the US Federal Reserve could start cutting interest rates as early as March, if price pressures continue to ease, with the European Central Bank following its lead the following month and the Bank of England making its first move in May.
However, central bankers have warned they will need much clearer evidence that labour markets have cooled enough to put inflation on a firm downward path before they relax their stance.
Indeed’s wage tracker — covering France, Germany, Ireland, Italy, the Netherlands and Spain — showed the picture varied across the euro area, with pay pressures still strong in countries such as the Netherlands and Germany where low-wage sectors had struggled to recruit.
Developed in collaboration with the Central Bank of Ireland, the tracker has caught the attention of rate-setters because the pay on offer to new recruits can be an early guide to pay awards for existing staff.
Pawel Adrjan, economist at Indeed, said the figures suggested labour markets had “reached a turning point” on both sides of the Atlantic, with a broad-based slowdown in most occupations “suggesting it is not a niche phenomenon”.
But Adrjan also warned it could take much longer in the euro area than in the US for wage growth to slow on official measures to the 3 per cent pace central banks consider to be broadly compatible with 2 per cent inflation, and that “the road for the ECB is going to be bumpier”.
This is because many European workers are covered by multiyear sectoral pay deals that catch up only slowly with past inflation, many of them still to be renegotiated over the course of 2024. Some countries have also just raised their minimum wages with the potential for knock-on effects on average earnings.
Philip Lane, ECB chief economist, said in an interview last week that it would “take time to have a good understanding of whether the wage settlements are decelerating”. Reaching wage growth of 3 per cent would be “a gradual process”, he added.
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